US homeowners now have over 5 trillion dollars in home equity, that gives them access to financial products that rely on home equity as a form of “collateral”. This year many homeowners may take an interest in these mortgage products, since they’re relatively easy to tap into.
When you are purchasing a home, you’re likely buying it at or below the appraised value. Which means you’re able to build equity quickly. Over time you build more equity as you make your monthly mortgage payments. When your home increases in value, the value of your equity in the home increases as well.
This build up of equity ensures some homeowners are able to take cash-out from their homes to pay off credit card bills, purchase a car or pay for college expenses. There are 3 primary options to “cashing out” your equity.
To qualify for a second mortgage on your home, a lender would require that you meet specific credit requirements as well as certain debt-to-income ratios.
What is a Second Mortgage?
Home Equity Loan
A home equity loan is typically a line of credit that you take out with your local bank. What you’re really getting is revolving credit, that you’re able to access every time you make payments. Remember that interest on a home equity loan is no longer tax deductible after the recent tax reform plan.
What is a Home Equity Conversion Mortgage (HECM)?
Cash Out Refinance
Using this method you can refinance your current mortgage and request to trade in cash for the equity. For example, if your home is worth $200,000 and you have a current mortgage of $100,000 you may be able to access an additional $60,000 in cash depending on your lenders requirements
Use Cash Out Refinancing When Renovating Your Home
In most cases, lenders will require borrowers to have had their mortgage at least one year before they are allowed the option of any type of cash-out refinance. However, FHA and VA home loans allow cash out transactions after 6 monthly payments and a minimum of 210 days in the home.
Cash out transactions may seem like easy enough options but they often come with their own risks. Remember that when you use these options you’re “trading” your equity in your home for cash. Meaning that if you default on your payments these lenders will likely become part owners of your property.